{"id":2430,"date":"2022-05-25T12:28:43","date_gmt":"2022-05-25T19:28:43","guid":{"rendered":"https:\/\/www.thor.ca\/blog\/?p=2430"},"modified":"2022-05-25T12:28:43","modified_gmt":"2022-05-25T19:28:43","slug":"dow-chemical-federal-court-of-appeal-confirms-limited-jurisdiction-of-tax-court","status":"publish","type":"post","link":"https:\/\/www.thor.ca\/blog\/2022\/05\/dow-chemical-federal-court-of-appeal-confirms-limited-jurisdiction-of-tax-court\/","title":{"rendered":"Dow Chemical \u2013 Federal Court of Appeal confirms limited jurisdiction of Tax Court"},"content":{"rendered":"

In Canada v Dow Chemical Canada ULC<\/em><\/a>, the Federal Court of Appeal (the \u201cFCA\u201d) confirmed that the jurisdiction of the Tax Court of Canada does not extend to varying or quashing an \u201copinion\u201d.\u00a0 Rather, the FCA held that the Tax Court\u2019s jurisdiction remains limited to determining the correctness of an assessment.\u00a0 Consequently, opinions must instead be challenged by way of a judicial review proceeding brought in the Federal Court.<\/p>\n

Dow Chemical <\/em>centered around subsection 247(10) of the Income Tax Act<\/em> (the \u201cITA<\/em>\u201d), which reads as follows:<\/p>\n

(10)<\/strong> An adjustment (other than an adjustment that results in or increases a transfer pricing capital adjustment or a transfer pricing income adjustment of a taxpayer for a taxation year) shall not be made under subsection (2) unless, in the opinion of the Minister, the circumstances are such that it would be appropriate that the adjustment be made.<\/p>\n

In essence, an adjustment that decreases a taxpayer\u2019s income under the transfer pricing rules (referred to as a \u201cdownward adjustment\u201d) can only be made if, \u201cin the opinion of the Minister\u201d, the adjustment is appropriate.<\/p>\n

Background<\/u><\/p>\n

In 2011, the Minister reassessed Dow\u2019s 2006 taxation year to add approximately $307 million to its income under the ITA<\/em>\u2019s transfer pricing rules.\u00a0 Dow objected to the reassessment.\u00a0 In March 2012, the Minister issued a proposal letter which proposed to allow additional interest expenses to Dow (i.e. to reduce Dow\u2019s income) in its 2006 taxation year, but subsequently reversed this position and refused to allow the additional interest expenses in its 2006 taxation year on the basis of a limitation period in the Canada-Switzerland Tax Treaty.<\/p>\n

In 2013, Dow submitted a formal request to the Minister under subsection 247(10) of the ITA<\/em> to have the additional interest expenses allowed in its 2006 taxation year; that is, Dow requested a downward adjustment.\u00a0 The Minister refused Dow\u2019s request.\u00a0 Accordingly, Dow filed an application in the Federal Court seeking judicial review of the Minister\u2019s refusal to grant the downward adjustment.\u00a0 Dow also appealed the reassessment of its 2006 taxation year to the Tax Court.<\/p>\n

By motion under Rule 58 of the Tax Court of Canada Rules (General Procedure)<\/em>, the parties asked the Tax Court to answer the following question:<\/p>\n

Where the Minister \u2026 has exercised her discretion pursuant to subsection 247(10) of the [ITA<\/em>] to deny a taxpayer\u2019s request for a downward transfer pricing adjustment, is that a decision falling outside the exclusive jurisdiction granted to the [Tax Court] under section 12 of the Tax Court of Canada Act<\/em> and section 171 of the ITA?<\/p>\n

The Tax Court concluded<\/a> that the Minister\u2019s exercise of discretion under subsection 247(10) was within the Tax Court\u2019s jurisdiction, so long as the assessment resulting from that exercise was properly appealed to the Tax Court.\u00a0 The Crown appealed that decision to the FCA.<\/p>\n

Applicable Legislation<\/u>\u00a0<\/u><\/p>\n

Section 12 of the Tax Court of Canada Act<\/em> provides that the Tax Court has exclusive jurisdiction to hear appeals on matters arising under the ITA<\/em> to the extent appeals are provided for in the ITA<\/em>.<\/p>\n

Section 169 of the ITA<\/em> provides for an appeal to the Tax Court to have an assessment vacated or varied.\u00a0 Section 171 of the ITA<\/em> provides the remedies that the Tax Court can grant in an appeal of an assessment: dismissing the appeal, vacating the assessment, varying the assessment, or referring the assessment back to the Minister for reconsideration and reassessment.<\/p>\n

Sections 18 and 18.1 of the Federal Courts Act<\/em>, in combination, grant the Federal Court exclusive jurisdiction to grant remedies in judicial review applications related to federal tribunals (including the Minister).\u00a0 Section 18.5 of the Federal Courts Act<\/em> states that the Federal Court does not have jurisdiction to review a matter where another statute (such as the ITA<\/em>) expressly provides for an appeal to the Tax Court or another specified court.<\/p>\n

Analysis<\/u><\/p>\n

The FCA agreed with the Tax Court that subsection 247(11) of the ITA<\/em> does not provide an express right of appeal of an opinion of the Minister under subsection 247(10).\u00a0 Subsection 247(11) generally states that the assessment, objection, and appeal provisions in Part I of the ITA<\/em> also apply to the transfer pricing provisions.\u00a0 Therefore, section 18.5 of the Federal Courts Act<\/em> does not expressly prevent the Federal Court from reviewing an opinion of the Minister under subsection 247(10).<\/p>\n

The FCA then reviewed the remedies that can be granted by the Tax Court and the Federal Court.\u00a0 In doing so, the FCA drew a distinction between the \u201cprocess\u201d leading to an assessment (i.e. the actions of the Minister or officials of the Canada Revenue Agency, which are not reviewable by the Tax Court) and the \u201cproduct\u201d of that process (i.e. the assessment itself, the correctness of which is reviewable by the Tax Court).\u00a0 The FCA held that an opinion of the Minister under subsection 247(10) of the ITA<\/em> falls under \u201cprocess\u201d, not \u201cproduct\u201d.\u00a0 In other words, the Minister\u2019s opinion is not an assessment, and as such it is not reviewable by the Tax Court.\u00a0 The FCA held that the power to quash or vary an opinion of the Minister under subsection 247(10) of the ITA<\/em> instead falls within the jurisdiction of the Federal Court under a judicial review application.<\/p>\n

The FCA also rejected the argument that the power conferred on the Tax Court to determine to correctness of an assessment must by implication include the power to vary or quash an opinion rendered by the Minister under subsection 247(10).\u00a0 While noting that \u201cit may be more convenient\u201d if the Tax Court had this power, it is not a necessary component of its jurisdiction over assessments.<\/p>\n

The FCA therefore allowed the appeal and held that an opinion of the Minister under subsection 247(10) of the ITA<\/em> is outside of the exclusive jurisdiction of the Tax Court.<\/p>\n

Takeaways<\/u><\/p>\n

The FCA\u2019s decision exemplifies the complexity faced by taxpayers and practitioners in tax litigation.\u00a0 Given the differing jurisdictions of the Tax Court and the Federal Court, taxpayers must be careful to choose the correct court depending on the remedy they are seeking (our previous posts here<\/a> and here<\/a> on the Iris Technologies<\/em> cases highlight similar pitfalls).\u00a0 In certain cases, taxpayers may need to bring parallel proceedings in both courts in order to ensure they can receive their desired remedy.\u00a0 Indeed, the FCA noted at paragraph 91 of Dow Chemical<\/em> that \u201cthe remedies available to both courts may be required if Dow is to succeed\u201d in achieving the desired downward adjustment.<\/p>\n

Unless and until Parliament enacts legislative amendments which sufficiently expand the powers of the Tax Court, taxpayers will continue to face fundamental jurisdictional questions and should seek professional advice as to the proper court(s) in which to bring tax litigation.<\/p>\n","protected":false},"excerpt":{"rendered":"

In Canada v Dow Chemical Canada ULC<\/em><\/a>, the Federal Court of Appeal (the \u201cFCA\u201d) confirmed that the jurisdiction of the Tax Court of Canada does not extend to varying or quashing an \u201copinion\u201d.\u00a0 Rather, the FCA held that the…<\/p>\n","protected":false},"author":49,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[30,41,15,16],"tags":[],"class_list":["post-2430","post","type-post","status-publish","format-standard","hentry","category-current-tax-cases","category-income-tax-act-ita","category-tax-audits","category-tax-litigation"],"_links":{"self":[{"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/posts\/2430","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/users\/49"}],"replies":[{"embeddable":true,"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/comments?post=2430"}],"version-history":[{"count":2,"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/posts\/2430\/revisions"}],"predecessor-version":[{"id":2432,"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/posts\/2430\/revisions\/2432"}],"wp:attachment":[{"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/media?parent=2430"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/categories?post=2430"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/tags?post=2430"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}